The economy is skidding, and President Obama is fresh out of “progressive” fixes.
To create the appearance of action, the President promotes education, even though millions of recent graduates are working at venues like Starbucks, and taps the strategic petroleum reserve, when stalling growth has already pushed down gas prices for six consecutive weeks.
His economic strategy to fire up growth and create jobs failed, Mr. Obama’s political strategy is to convince Americans high unemployment, high taxes, high health care costs, and a sinking standard of living is the best any president could do.
Now, the “bipartisan” Congressional Budget Office has bought into the hoax.
Its long-term assessment of the federal budget concludes, if the President’s health care reforms stay intact and the additional taxes he wants are implemented, the national debt will grow from 69 percent of GDP in 2011 to a manageable 84 percent in 2035; however, if taxes are kept at their current levels and important provisions of recent health care act are relaxed, the debt would jump to an unsustainable 187 percent of GDP.
As the Republicans can’t seem to come up with spending cuts that do little more than dent the problem—they are proposing $200 billion a year when federal spending after inflation is up $1 trillion since 2007—more taxes must be needed to maintain the roads, national defense, and the ever expanding army of bureaucrats that appear unable to curb new fraud on Wall Street.
Fortunately, the future need not be so grim. Either it has to be a lot better than the CBO projects, or the economy is headed over a cliff. I have a bit more faith in my country than the dismal scientists who work on Capitol Hill.
Through 2017, the CBO analysis assumes annual GDP growth cannot exceed 3.3 percent, and afterwards, growth will slow to only about 2.1 percent for several decades. That is much less potential economic growth, and a tepid 2.1 percent pace is too slow to sustain for long—either the economy grows faster or it falls apart altogether.
U.S. productivity grows at a bit more than 2 percent a year, and the labor force grows at about 1 percent. The sum yields potential annual growth at full employment of more than 3 percent. And with so many folks currently unemployed, the economy can grow at 4.5 or 5 percent for several years before trending down to 3 percent growth.
Moreover, at only 2 percent GDP growth, the combination of productivity and population growth will push up unemployment one percentage point each year—perhaps more; and drive wages into the ground and destroy economic confidence.
Remember, 2 percent annual productivity growth is an average, many sectors do better and those—like manufacturing and high-tech services—pay the best wages. At 2 percent GDP growth, those industries can accommodate increased sales and raise profits by laying off highly-paid workers. Meanwhile, employers in sectors where productivity advances more slowly would naturally get more pessimistic and reluctant to hire. On a net basis, with only 2 percent GDP growth, layoffs mount, unemployment rises, wages fall, retail sales flail, and the economy cycles down into recession.
Since January, growth at about 2 percent has caused a surge in layoffs—as measured by new unemployment claims. The May jobs report was very week and June is expected to be little better. Now retail sales are flagging and the economy is tittering on the edge of a second recession and double digit unemployment.
Seen in this context, the CBO report is sophistry and an incompetent apology for Obamanomics. The CBO buys into the Presidental myth that robust American growth is the stuff of history books, we can teeter along at 2 percent, and we should all learn Chinese.
America is not suffering from an inability to make things efficiently and well, but it is plagued by too little demand for what Americans can make. Huge trade deficits on oil and with China—fueled by foolish U.S. energy and trade policies—are sending too many consumer dollars and jobs abroad that don’t return to purchase U.S. exports and create American jobs.
Higher health care costs imposed by recent reforms and President Obama’s thumb-on-the- scale-for-unions National Labor Relations Board are causing manufacturers, who are enjoying some new growth, to expand production with as few new hires as possible.
After all, if you were making components for the aerospace industry, computers or cars, how could you pay new employees $40,000 a year plus double what German manufacturers pay for health plans? And would you want the United Autoworkers doing to your balance sheet what it did to General Motors?
Instead, of developing domestic energy, the president runs down the Strategic Petroleum Reserve; instead of combating Chinese protectionism, he sends out Secretary Geithner to alibi for Beijing’s intransience; and instead of cutting rocketing health care costs, he taxes citizens for the mere privilege of getting out of bed in America.
America can grow, prosper and lead again, but not with a defeatist president and Congress lacking the sense to fire a bunch of incompetent economists masquerading as bipartisan analysts.
Peter Morici is a professor at the Smith School of Business, University of Maryland, and former Chief Economist at the U.S. International Trade Commission.